Today, the Multistate Tax Commission (“MTC”) held a special meeting where the whole Commission (a group of member states) voted to approve model apportionment regulations, including provisions concerning market sourcing.
Since 2009, the MTC’s Uniformity Committee has been developing modernized apportionment regulations—Model General Allocation and Apportionment Regulations. In 2014, the MTC approved the Uniformity Committee’s work on model regulations concerning factor-weighting and equitable apportionment. With state and taxpayer participation, the Uniformity Committee continued to develop other provisions within the model regulations, including provisions concerning the sourcing of receipts and reporting requirements when taxpayers choose to change their method of assigning receipts. For additional background, see our prior alert here.
Today, the MTC voted to adopt the entirety of its Model General Allocation and Apportionment Regulations. Here are some takeaways:
- The model apportionment regulations move from a cost of performance to a market sourcing model for determining a taxpayer’s receipts factor. The regulations specifically provide that receipts, other than receipts from sales of TPP, are in a state “if and to the extent the taxpayer’s market for the sales” is in that state.
- For sales of services, the MTC has followed the Massachusetts approach of determining a taxpayer’s market based on where the service is “delivered,” as opposed to the “benefit received” model used in many other market-sourcing states.
- After substantial revision, the adopted regulations largely follow the Massachusetts model that limits a taxpayer’s ability to change its method of assigning receipts. Our view is that the Massachusetts rule exceeds the Department of Revenue’s statutory rulemaking authority. This will likely be an issue in other states, if they adopt the MTC model regulations.
- The model regulations exclude receipts from “hedging activities” from the definition of receipts. “Hedging activities” are specifically defined, and if states choose to adopt the model regulations, taxpayers conducting such activities should consider whether their activities fit under that definition.
The question now turns on how many states choose to adopt the MTC’s model apportionment regulations. With a large number of state taxing authorities participating in drafting these regulations over the past eight years, we expect states to adopt, at a minimum, some of the MTC’s model provisions.
Client Alert 2017-060